Mcdonnell Budget Speech

7/31/2019 Mcdonnell Budget Speech

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from 7.2% in February 2010 to 5.7% today. Thats a drop of over 20%. We have the lowestunemployment rate in three years, and the lowest in the Southeast, by a long shot. WhileVirginias unemployment rate stands at 5.7% the next closest state in the Southeastern region tous is Alabama, at 7.8%.

Payroll withholding and sales tax collections, which are closely linked to current economicactivity and account for nearly 82 percent of the total general fund, exceeded the forecast by$89.2 million. This amounts to about 70 percent of the revenue surplus.

We exceeded the annual forecast in all of the major sources:Net individual income taxes grew 6.7% in FY2012 ahead of the annual forecast of 5.9%;Sales and Use Taxes grew 3.6% in FY2012 double the annual forecast of 1.8%; andCorporate income taxes grew 4.6% in FY2012 ahead of the annual forecast of 0.7%

The fiscal year 2012 revenue surplus is also attributable to reliable fiscal advice, which droveVirginias consensus revenue forecast process. In the fall of 2011, based on candid analysis

from economists, business leaders, and General Assembly members received through GACREand JABE, we adopted an economic outlook for fiscal year 2012 which anticipated thecontinuation of slow growth during recovery. The resulting revenue forecast was conservative,which was crucial to our ability to budget responsibly in a complicated environment. And, wedid not revise or increase the general fund forecast during the 2012 legislative session.

Our administration continues to focus on productivity and efficiency, and you approved many ofour recommended government reforms, consolidations, and savings strategies this session. Wedirected our agency managers to innovate, be frugal, and not to spend all their appropriations atthe end of the fiscal year just because they had the money. Due to the dedication and sacrifice ofour state employees, it worked. Thus, on the savings side, there was $319.3 million in unspentgeneral fund appropriations, recoveries, and certain non-general fund balances at the end of June.This compares favorably to the $234.1 million that I reported as the savings at the end of fiscalyear 2011. Together we are proving that, unlike Washington, we can balance a budget annuallyand actually spend less while maintaining quality core services for our people.

Of the $319.3 million in savings, $66.1 million is in balances which come from certain non-general fund accounts that have been traditionally required to be reported on the general fundbalance sheet at the end of the year. Approximately $66.2 million of this amount consists ofbalances in higher education operating funds that are brought forward pursuant to mandatorylanguage specified in the Appropriation Act. The remainder, or $187.0 million, constitutesoperating savings from unspent general fund appropriations and recoveries. Specific measuresthat have contributed to the overall savings include a continuing hiring freeze, incentives topromote individual employee savings ideas as well as better agency performance, thereorganization of both management and operations within many state agencies, and theperformance incentive bonus. The need for traditional layers of management has beenquestioned and modified, and efficiencies through contract reviews are beginning to net savingsfor the bottom line. This important work will continue through our Government ReformCommission, Cabinet Secretary analysis, and additional external audits of key agencies which


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million for natural disasters, and another $12.3 million was designated for deposit of surplusrevenues to the Water Quality Fund, as required by statute. What this means is that there was notenough in the remaining revenue surplus to cover the cost of the bonus without agency savings.

I remained confident throughout this process that agencies could achieve the required savings in

order to implement a performance bonus, as the employees did when I first recommended aperformance bonus in FY2010. Earlier this year, I directed our agency heads to identifypotential savings and the strategies by which to achieve them. As a result, there were $122.8million in discretionary general fund balances in agency unspent appropriations. This is morethan enough to meet the $77.2 million costs of the 3% bonus. Therefore, we will meet ourcommitment to eligible state employees, and they will receive a full 3% performance bonus onDecember 1, as a reward for good stewardship of the taxpayers money.

After five years without a pay raise, I am pleased that we are able to reward our employees witha performance bonus, while simultaneously preserving core services and building up theCommonwealths cash reserves. Thus, today we have additional positive news to share

regarding the Commonwealths liquidity.

During the three-year span covered by the Great Recession (fiscal years 2007, 2008 and 2009),our unrestricted cash reserves declined by 45 percent from $4.2 billion to $2.3 billion. Inresponse to the fiscal discipline that has governed our joint actions over the last three years, thistrend has been reversed. Virginias available cash reserves have risen 30 percent from $2.3billion on June 30, 2009, to $3.0 billion on June 30, 2012. This added liquidity is significant,and provides us an added measure of budgetary flexibility, which will bolster bond rating agencyfavorability as we continue to navigate through these uncertain, volatile times.

Finally, we are moving well ahead of the original schedule to eliminate the accelerated sales taxpolicy. In 2009, the General Assembly passed the accelerated sales tax. Most of us agree that itis a poor policy, and I have called for its elimination as quickly as is possible. You approved myrecommendation to begin to phase out this provision beginning in FY2013. However, startinglast year, we took additional steps to speed up elimination even further, by phasing it out twoyears early. Thanks to your good work this session, we reduced the acceleration by $50.0million in FY 2012, which means that approximately 96% of retail merchants are no longertransmitting the unfair accelerated sales tax.

In summary, we have now posted three straight budget surpluses totaling nearly $1.4 billion.

The Rainy Day Fund at the end of this biennium will be the largest it has been since FY 2008.

We are rewarding our state employees for their sound management and successful savingsstrategies with a 3% performance bonus, while saving taxpayer dollars at the same time.

Revenues are up due to economic growth, not tax increases.

I salute you for working with us, across party lines, to make these noteworthy accomplishmentshappen.


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However, as much as we may want to enjoy our improving fiscal situation, we mustacknowledge that the way ahead still remains very uncertain. Policies and indecision comingfrom Washington D.C will potentially have a tremendous adverse impact on all of the states,especially Virginia. Financial crisis in the European Union, changing governments and conflict

in the Middle East, and unacceptable rates of national unemployment and debt may create realchallenges in FY 2013.

The biggest immediate factor is the potential for devastating, automatic, capricious cuts to ourmilitary and defense industry as a result of budget sequestration.

As you know, sequestration is the budget process that the President and Congress set up lastsummer as a last resort to push Washington toward balancing the federal budget and get a debtlimit deal done before a looming deadline. Our nation was on the brink of default. It was anhistoric and unprecedented time in our nations history. It was simply inconceivable that ourgreat nation could be about to exceed its debt limit and default on its credit, with the downgrades

and economic chaos that would follow. For that reason, many reluctantly supported the finalagreement that passed, not because of what it contained, but because of what it prevented.

It was anticipated by all, that following passage of the debt limit deal, a so-called SuperCommittee would come together, with leadership from the President, and find a way tosignificantly reduce national spending, without allowing the automatic defense cuts contained insequestration to take place. The belief was that the Super Committee would have the timenecessary to rationally and wisely fashion a targeted and prudent approach to addressing ournations spending and debt crisis. It failed. And now we are on the verge of sequestration takingplace; on the brink of another potential fiscal disaster.

This coming January, absent a change in law, automatic cuts are going into effect in the federalbudget that will slash military spending dramatically and randomly. By this November WARNAct notices will likely go out to hundreds of thousands of Virginians warning of potential joblosses. As reported by the Richmond Times-D ispatchon July 18, 2012, a study has suggested thatif fully implemented, sequestration could cost Virginia 207,571 jobs, the second highest amountin the nation.

And Virginia is not alone. Due to sequestration, California, Texas, Maryland, Florida,Pennsylvania, New York, Massachusetts, and Georgia all stand to lose a significant number ofjobs. A failure to stop sequestration will impact every state in the nation and imperil nationalsecurity and economic recovery at the same time. In short, we cant afford, and should fight,sequestration as the way ahead to reducing the national deficit.

We are embarking on a course without precedent in the post World War II era. If sequestrationgoes forward, we will not be fielding the military that our Pentagon says we need to maintain ourcurrent posture. Former Secretary of Defense Robert Gates has said that the cuts would bedevastating to our national security.


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Here in Virginia, this force reduction would be a double blow. We share with all Americans ourconcern for the safety of our country and for the young men and women who are out in distantbattlefields taking risks to keep us safe. But we also will suffer disproportionate consequencesgiven that our state is the home of such a large share of our armed forces.

This policy will have a significant impact on next years budget and we must continue to pushCongress and the President for a well-reasoned solution, now. At the same time, Virginia mustprepare for the worst. Our creation of the FACT fund and our efforts to continue to increase thesize of our Revenue Stabilization Fund are steps in the right direction toward financial security.Moreover, we must remain committed to creating new jobs whenever and wherever we can inthis Commonwealth to promote a healthy and diverse economy that is not overly dependent onany one industry or customer. This is simply a matter of our economic well being. I have alsosigned EO 39 which creates a commission to plan for ways to help soften the impact ofnecessary and coming federal budget cuts.

Private sector job creation and economic growth have been and continue to be the number one

objective of our administration. Given the uncertainty that now faces us with the prospects ofsequestration, it is the right objective to promote consensus building across party lines in orderto tackle the issues that are most important to all Virginians: gainful employment and economicsecurity. I thank you for your past support of our economic development efforts, and thesignificant resources you approved in the past three budgets, and hope that you will continuesuch support as we jointly seek to get our people back to work.

Virginians have always come together at times of great consequence and I believe that we willdo so again in the face of sequestration and its negative impacts on our Commonwealth. I amthankful for this underlying spirit because it facilitates the job of governing between branches ofgovernment and political parties. I will continue to seek your guidance and advice as fiscalrealities warrant over the remainder of my term in office.

Similarly, we must assure all concerned that we have the resources and cash reserves necessaryto protect our fiscal integrity, and to guarantee public trust in our financial dealings. Our three-consecutive budget surpluses are a very positive signal to bond rating firms. Our relatively lowunemployment rate is also noteworthy. During our January visit to the bond rating agencies inNew York, Moodys, Standard and Poors and Fitch were all complementary of theCommonwealths longstanding tradition of fiscal responsibility, problem solving, and prudentborrowing. We must continue those traditions by preparing now for future actions of the federalgovernment that we cannot control or accurately predict.

There are also other key state obligations and needs that must be addressed at the same time.

One of our biggest achievements accomplished during this past General Assembly Session wasour successful bipartisan effort to stabilize and strengthen the Virginia Retirement System for thethousands of Virginians who depend upon it. By working together with leaders such as theSpeaker, Senators Janet Howell and John Watkins and Delegate Chris Jones, we are institutingnew reforms that will lower total unfunded liabilities by nearly $9 billion by 2031. That means a


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more solvent system. It affirms a commitment to our hardworking state employees, teachers,firefighters, police and local employees who are counting on VRS to fund their retirementbenefits.These retirement reforms usher in a new era of options for state and local employees and takemajor steps toward addressing the rapidly increasing unfunded state and local liabilities of the

retirement system, which were estimated by VRS to total nearly $24 billion.As part of these revisions to VRS, we were also able to fund the highest employer contribution inVRS history, which includes an estimated total of $2.4 billion over the 2012-2014 biennium inemployer contributions for state employees, teachers and law enforcement.These major reforms include changing some of the benefits and providing a new hybridpension/401(k)-style retirement plan. These reform actions constitute a significant effort toaddress the existing unfunded liabilities that face Virginia, and help achieve long-term financialsecurity for the Commonwealth. As a result, Moodys Investor Service quickly issued a noticeciting our reforms as a credit positive.All state employees were required last year to begin contributing 5 percent of their salariestoward their pensions, which was offset by a 5 percent raise. This years legislation, as amended,

expands that contribution to include local employees who are in VRS. The mandatorycontribution is offset by a pay raise from the localities, which can phase-in the requirement andthe pay raise over 5 years. The Commonwealth will also begin to increase the employercontribution rate for the existing defined benefit plan, so that over the next 6 years it conforms tothe actuarial recommended contribution rate using a 7 percent investment yield assumption.Under these provisions of the VRS reform legislation, an employee will take a personal stake intheir retirement and invest a portion of their paychecks toward their future financial security.Risks will be shared between the employer and the employee. Responsibility will be delineatedand accountability will be enhanced.As I pledged to everyone here at this time last year, significant pension reform was one of mymain priorities for last session, and although it was a challenging process, we were able to cometogether and agree on a long-term solution for our retirement system. Thank you for your effort.

In education, I thank you for your partnership as we strive to improve outcomes for all age levelsstarting in kindergarten and continuing through college. The new biennial budget includes anincrease of $655.1 million in direct aid and we continue to work to increase the dollars that gointo the classroom and truly impact student outcomes. With your help, through legislation, weimplemented significant K-12 and higher education reforms to make sure that, upon graduatingfrom high school, our students are college or career ready. We have increased the access andaffordability of a college education for Virginia students.

Together we laid groundwork to increase educational options for our young people throughlegislation that facilitates the expansion of high-quality public charter schools, virtual schools,and college partnership laboratory schools. We also opened the door for low-income studentswho otherwise might not have access to a high-quality education to have the opportunity toattend a non-public school by providing tax credits to companies that contribute to theeducational improvement scholarship fund. Through legislation and full funding of the EarlyReading Initiative we can better ensure that every third-grader is provided reading interventionservices before moving on to fourth grade. Reading is such an essential skill and we cannot letour young people fall behind at an early age. Your approval of investments to increase our


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STEM focus, implement pilot programs in merit pay and character education, and increase thenumber of Governors Schools and career and technology schools are to be commended.

It is critical that we are preparing our students for the highly-skilled, highly-technical jobs of the

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century, while making sure that they are able to compete in this global economy. Last year,your unanimous support of landmark higher education legislation, The Virginia HigherEducation Opportunity Actof2011 or Top Jobs Act of2011, provides a roadmap for anadditional 100,000 degrees from our colleges and universities over the next 15 years, with afocus on STEM-H degrees. Because of this legislation, more Virginians will have theopportunity to go to college than ever before. We are already seeing the results.

The legislation also established a framework for sustained reform-based investment in ourcolleges and universities to increase access and affordability for our students. This framework,and the $100 million investment in FY 2012 and the $230 million of new resources in theupcoming biennium will help reign in rising tuition costs and end the cycle of disinvestment in

our higher education system. In a few weeks, as students prepare to return to campus for anotheryear, undergraduates at the Commonwealths public colleges and will experience the lowesttuition and mandatory fee increase in a decade. The average tuition increase of 4.1 percentrepresents a dramatic drop from last year's average tuition increase of 7.9 percent, and wellbelow the unsustainable average annual increase of 9.1% over the past decade.

The budget this year also contains a new incentive, initiative, and performance based fundingmodel for higher education, as well as a requirement for university productivity enhancementsthrough a reallocation of resources to the TJ 21 goals. The strong partnership with our universitypresidents and boards is making these reforms a success.

Another critical priority for us is addressing the Commonwealths transportation challenges.Upon taking office, we conducted a Comprehensive Performance Audit of the VirginiaDepartment of Transportation. This audit identified over $1.4 billion in funds that have sincebeen invested in the Commonwealths roadways, and made over 50 recommendations to helpstreamline VDOT operations, most of which have been implemented. Last year, working acrossparty lines, we laid the groundwork for the largest investment in transportation in decades. Byaccelerating the issuance of previously authorized CPR Bonds, authorizing new GARVEEbonds, and creating the Virginia Transportation Infrastructure Bank, all at a time when interestrates are at near historic lows and construction prices are substantially below estimates, VDOT ismoving forward with over 900 projects all throughout Virginia.

For example, last week I participatedalong with some of you here todayin thegroundbreaking ceremony for the I-95 Express Lanes Project. This long stalled project willfinally deliver much needed congestion relief and transportation choices to one of the mostcongested corridors in the country. Further, construction of this project will grow the Virginiaeconomy by $1.5 billion, lead to $464 million in new personal earnings for workers residing inNorthern Virginia, and support more than 12,600 direct and indirect jobs.


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Together, we are making progress in addressing our transportation needs, with much more still tobe done.

Virginia has been a national leader in weathering the recent economic storm.

Our unemployment rate has fallen to 5.7%, lowest in the Southeast, down over 20% since wetook office.

Weve turned $6 billion in shortfalls into three-straight surpluses totaling nearly $1.4 billion.

Weveput the most new funding into transportation in a generation.

Weve invested significantly in higher education, and this year we see the lowest annual increasein tuition and fees at our public colleges and universities in a decade.

Weve facilitated economic growth and we havent raised taxes.

Weve budgeted wisely, invested smartly in the core functions of government and madeRichmond more efficient through government reforms.

Growing our economy and getting government spending under control: Those are the twin goalswe have worked towards together over these past few years.

We will continue to offer new ways to create savings and efficiencies, and we will continue toinvest in education, transportation, public safety, and economic development, the coregovernment functions.Next years budget and legislative priorities will all be aimed at laying asolid foundation for growth and opportunity in the future.

Throughout the past three years you have been tremendous partners and leaders in this bipartisanwork.

Our collective work has resulted in back-to-back-to-back revenue surpluses and budgetarybalances totaling nearly $1.4 billion. We should celebrate these Virginia successes.

Working together, I know we will continue to achieve good things for the people of Virginia.And we will continue to make this a strongerCommonwealth of Opportunity for all ourcitizens.

Thank you

Mcdonnell Budget Speech

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